July’s UK consumer price index (CPI) came in hotter than expected at 10.1%. This is a 40-year high and has the potential to drive share prices further down as consumers struggle with a cost of living crisis. So, here are five shares I’m considering buying.

Lloyds

As the UK’s biggest lender, I believe Lloyds (LSE: LLOY) shares are a sound choice for my portfolio. It earns its money from the difference in providing and earning interest from loans. This is otherwise known as net interest income.

Interest rates are expected to go as high as 3% by 2024 as the Bank of England tries to combat inflation. As a result, the high street bank should get a top-line boost from higher lending costs, while benefiting from lower interest paid to customers. With enough cash to set aside for bad loan provisions, Lloyds doesn’t need to increase its savings rate to bring in more cash, thus allowing it to increase its profits. This was evident in the company’s latest half-year results, which saw it recording excellent numbers.

It’s worth noting, however, that the majority of its income stems from mortgages. With house prices and mortgage approvals starting to decline, it remains a possibility that Lloyds’ revenue could be impacted. Nonetheless, analysts think that the increase in rates should offset any declines for the time being. In fact, Lloyds stock is rated a buy as its dividend is also expected to increase. It has an average price target of 64.33p, or a 40% upside.

SSE

Energy prices have been the main culprit behind sky-high inflation. That’s because energy prices are at their highest levels since 2009. As such, I think SSE (LSE: SSE) is a share to buy for my portfolio given the circumstances.

When wholesale energy prices go up, energy suppliers increases their rates to cover the extra costs. This has allowed companies like SSE to benefit, with its top and bottom lines seeing modest increases. As a matter of fact, its profit and loss account saw its best numbers in FY22, which is why its shares are up 9% this year.

The latest inflation report shows that energy prices rose 3% on a month-on-month basis. And with a higher price cap expected in October, SSE should benefit from this. After all, its latest trading update indicates that it expects adjusted earnings per share (EPS) of at least £1.20 for FY23. This would bring its EPS to its highest level in five years.

Additionally, its dividend yield of 4.7% is rather modest and is expected to rise given its most recent increase in payout, from 25.5p to 60.2p. SSE shares are rated a moderate buy with an average price target of £20.78.

Unilever

Next on my list is Unilever (LSE: ULVR). Its share price has been rather volatile this year. Nevertheless, it has recovered by 5% since its reported its H1 numbers. Its shares are now only down by 1% on a year-to-date basis.

The fast-moving consumer goods conglomerate produces beauty products and personal care, foods and cleaning agents. Its brands include Lynx, Ben & Jerry’s, Dove, and many more. These are household names and have tremendous pricing power, given the inelastic demand surrounding most of its products. This is strongly reflected in the revised outlook given by CEO Alan Jope, when he improved the firm’s guidance.

Our guidance for underlying sales growth in 2022 was previously at the top end of a range of 4.5% to 6.5%. We now expect underlying sales growth to be above that range, driven by price with some further pressure on volume.

Unilever CEO Alan Jope

Nevertheless, it should be noted that Unilever shares are more of a defensive play to protect from potential downside at the moment. Analysts are forecasting an average price target of £40.81, which only means a potential 3% gain if I were to buy shares now.

Burberry

Burberry (LSE: BRBY) shares are a good inflation hedge, in my opinion. The brand’s status as a luxury retailer allows it to pass on many of its costs to consumers given the nature of its target market. This was confirmed by CFO Julie Brown in its Q1 trading update, with a positive outlook for the company.

The FTSE 100 retailer has benefited from the return of global travel, with a substantial amount of its sales coming from tourists. It saw its like-for-like sales numbers grow by 1% on an annual basis, despite lockdowns in key revenue driver, China. Excluding China, sales figures were actually rather impressive. They were 16% higher in Q1 overall, with EMEIA boasting impressive 47% growth. Moreover, the company’s most profitable products (leather goods and outerwear) also saw double-digit growth.

That being said, I should point out that China remains the firm’s achilles heel for the moment. With its government sticking to its zero-Covid policy, I don’t expect sales figures from that region to see an uptick any time soon. This is why its average price target currently sits at £19.34. Therefore, this is more of a long-term investment with a higher upside once China’s retail sales fully recovers.

Tesco

Last on my shopping list are Tesco shares (LSE: TSCO). Given that its core products are consumer staples, I’m expecting Tesco shares to be robust in a recessionary environment. It’s also been steadily increasing its dividend payouts, which should serve as an added benefit.

As the market leader in the UK supermarket sector with more than a quarter of the market share, I think Tesco will be able to outperform its peers. Its Aldi price match across hundreds of items has been a success so far. According to the last several Kantar grocery reports, the supermarket leader has seen its market share remain relatively robust. It has also managed to outperform most if its competitors with higher sales figures. And its Q1 trading update showed its strength in the industry.

Having said that, sales figures are expected to come in slightly lower for the year. The grocer no longer enjoys the tailwinds of the pandemic and faces slower sales as a result of high inflation. Even so, I still think Tesco can utilise its strong supply chain and relationship with customers to match last year’s stellar performance. Analysts seem to share the same sentiment, rating Tesco shares a strong buy with an average price rating of £3.19.

The post Inflation hits 10.1%! 5 shares to buy now! appeared first on The Twelfth Magpie.

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John Choong has positions in Burberry. The Motley Fool UK has recommended Burberry, Lloyds Banking Group, Tesco, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

When I compare the Tesco (LSE: TSCO) share price to its UK supermarket peers, it’s actually doing relatively well. Notwithstanding the fact that its 10% down, its competitors are faring much worse. With a higher price-to-earnings (P/E) ratio of 13, Tesco shares may not necessarily scream bargain. Nonetheless, there are positives that warrant a closer at its stock.

As cheap as a meal deal?

For one, Tesco remains the market leader. It boasts more than a quarter of the industry’s market share. This is impressive considering the saturated market in which it operates. Secondly, the most recent Kantar grocery report shows that the grocer managed to grow its market share by 0.2% on a year-on-year (Y/Y) basis, in the 12 weeks to 12 June. More importantly, despite its sales figures taking a 1.1% hit, Tesco still managed to outperform all of its peers, bar Aldi and Lidl.

Tesco’s strength can be attributed to two key reasons, I feel. The first is the success of its Clubcard programme, which encourages repeat purchases through lower prices. The second is the expansion of its bargain line. In its latest Q1 trading update, management mentioned the expansion of its Everyday Low Prices and Aldi Price Match products by 19% (Y/Y).

Tesco can’t ketchup with prices

Kraft Heinz and Tesco can’t seem to agree on how to price its Heinz products. The American company argues that skyrocketing cost has made production more expensive, hence the price increases. But the retailer says that it won’t pass on what it says are unjustifiable price increases to its customers.

As a result, Tesco has stopped stocking Heinz products for the time being. This is in line with trying to keep costs low for consumers while still making a profit. While talks between the two giants are ongoing, some Heinz products have already been made unavailable online. Nevertheless, this isn’t a unique incident. In 2016, Unilever increased its prices too, which resulted in the removal of Marmite, PG Tips, and Pot Noodle from Tesco’s website.

So, will this impact the retailer’s overall sales figures? Well, due to the cost-of-living crisis, management stated that customers are beginning to purchase more own-brands. So, I don’t expect the temporary unavailability of Heinz products to be detrimental, despite many of its products being staples. Having said that, I’ll be monitoring the situation closely, as further disruptions with other suppliers could negatively impact the firm’s top and bottom lines.

Buying back stock

Despite all that, Tesco is in line to achieve the guidance it set out for itself. Additionally, the company decided to put its £750m share buyback programme into effect yesterday. This shows confidence that the current Tesco share price is undervalued.

Taking everything into consideration, I think the shares are reasonably priced, but not a bargain. I’m not a big fan of its slim profit margins (2.5%) that are expected to decline for the foreseeable future, and I don’t see a huge amount of growth in its top line. As such, I won’t be buying Tesco shares for the time being. Instead, I’ll be looking to buy shares that are more resistant to the impact of inflation.

The post Is the current Tesco share price a bargain? appeared first on The Twelfth Magpie.

More reading

• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Are Tesco shares losing their momentum?
• Tesco’s share price drops 2% on Q1 trading miss. What’s gone wrong?
• As Tesco shares dip on Q1 results, is this a brilliant time to buy?
• How much might £19,999 in a Cash ISA be worth in 2036?

John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J), Tesco, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Tesco share price journey

As a quick reminder, Tesco is the UK’s biggest retailer and one of the so-called big four supermarkets in the UK.

So what’s happening with Tesco shares currently? Well, as I write, the shares are trading for 256p. At this time last year, the shares were trading for 222p, which is a 15% increase over a 12-month period.

Since the turn of the year, Tesco shares have fallen 11% from 289p to current levels. This is due to the issues mentioned earlier but more on that later.

The bull and bear case

Let’s take a look at Tesco’s share price valuation first of all. At current levels, the shares are on a price-to-earnings ratio of 12. The general consensus P/E ratio for supermarkets is 10 and two of Tesco’s competitors, Morrisons and Sainsburys, are under that ratio.

On the surface of things. the Tesco share price may look expensive, but there are other factors at play. Firstly, I believe Tesco has a competitive advantage as the UK’s largest retailer. Conversely, competition is intense in the supermarket sector and the introductions of rivals such as budget supermarkets Aldi and Lidl have hindered the progress of the big four supermarkets in recent years.

I do understand that past performance is not a guarantee of the future. But when I look at Tesco’s performance, I am buoyed. Since the pandemic struck in 2020, it has managed to grow revenue and profit in 2021 and 2022. Coming up to date, a Q1 trading update for 2023 was positive too. I noted that like-for-like sales in the UK and ROI rose by 1.5% year-on-year and close to 10% over a three-year period. Furthermore, sales of £12.5bn for the quarter was actually greater than in the pandemic.

The current broader macroeconomic picture is one of uncertainty. Soaring inflation, the rising cost of materials, and the supply chain crisis will have a material impact on Tesco and other retailers in the industry. Profit margins could be squeezed, which could affect returns and the Tesco share price. In addition to this, if Tesco passed these costs onto its customers, it could lead consumers to look for cheaper alternatives due to the current well-documented cost-of-living crisis.

One other positive I must note for Tesco is its dividends, which would boost my passive income stream. The current dividend yield stands at just below 4.5%. Dividends are not guaranteed and can be cancelled, however.

What I’m doing now

Should I buy Tesco shares? The competitive advantage, performance record, and passive income opportunity speak to the buyer in me. Current macroeconomic issues and competition are swaying me otherwise.

Tesco shares don’t look like a bargain compared to its competitors. On the other hand, it is a quality company with an unrivalled market position and excellent growth prospects. The old adage you get what you pay for springs to mind here.

I’ve decided I won’t be adding Tesco shares to my holdings currently. The uncertainty linked to the current economic picture is the biggest factor putting me off. I will keep an eye on developments, however.

The post Is the Tesco share price a bargain at current levels? appeared first on The Twelfth Magpie.

More reading

• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Are Tesco shares losing their momentum?
• Tesco’s share price drops 2% on Q1 trading miss. What’s gone wrong?
• As Tesco shares dip on Q1 results, is this a brilliant time to buy?
• How much might £19,999 in a Cash ISA be worth in 2036?

Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Tesco (LSE: TSCO) shares have been struggling to ride the storm of recent market volatility, falling 15% so far in 2022. That being said, the shares have returned over 10% in the last 12 months, highlighting a strong recovery from the pandemic.

With the stock currently sitting at 250p, is now the time to buy? Let’s take a closer look.

Strong results

Tesco released its Q1 2023 trading statement last week, which contained some solid results. Like-for-like UK and ROI sales rose by 1.5% year on year, and 9.7% over a three-year period. The £12.5bn sales figure surpassed pre-pandemic results, highlighting the impressive recovery of the firm. In Central Europe, sales grew over 9% in the past year, demonstrating the growing international presence of the firm. In addition to this, the firm announced it had raised its market share by 37 basis points, which outperformed expectations in both value and volume.

Tesco has also been taking steps to build out its online delivery presence. In January, it announced plans to open 25 new urban fulfilment centres across the UK to capitalise on the growing online demand. Analyst predictions suggest the online grocery market could be worth over £22bn by 2025. Tesco looks well-positioned to take full advantage of this growth should its fulfilment plans materialise.

In addition to this, it has been taking encouraging steps towards competing with cheaper supermarket chains. Its Aldi Price Match scheme has grown to take in 19% more products this year than last. Its Low Everyday Prices products have risen by the same percentage.

Finally, Tesco shares currently yield a dividend of 4.36%. This could help me combat rising inflation and add some passive income to my portfolio.

Expensive shares

Tesco stock currently trades on a price-to-earnings (P/E) ratio of 12.7. On the surface, this doesn’t seem too expensive and isn’t far from the value P/E barometer of 10. However, looking at J Sainsbury and Marks and Spencer, which trade on P/E ratios of 7 and 9, respectively, the share price does look a little steep for my liking.

Although Tesco has been taking action to stop the drift towards low-cost rivals like Aldi and Lidl, rising inflation could hinder this progress. As prices are being pushed up across the board, and the cost-of-living crisis worsens, more and more customers are likely to make the switch. Tesco operates with tiny margins so any losses in its consumer base could prove catastrophic.

A buy at 250p?

As I said, at 250p, Tesco shares look a little too expensive for me, especially compared to the wider market. Yes, sales have proved consistent, and growth prospects are encouraging. But I think rising prices could really hurt Tesco over the coming months. What’s more, the threat of a UK recession could slow the supermarket’s progress even more. For this reason, I won’t be buying the shares today.

The post Should I buy Tesco shares at 250p? appeared first on The Twelfth Magpie.

More reading

• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Are Tesco shares losing their momentum?
• Tesco’s share price drops 2% on Q1 trading miss. What’s gone wrong?
• As Tesco shares dip on Q1 results, is this a brilliant time to buy?
• How much might £19,999 in a Cash ISA be worth in 2036?

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J) and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Putting eggs in different baskets

In light of soaring high inflation and lower consumer spending, Tesco reported a generally decent set of Q1 numbers. Overall, group retail sales were up 2% year-on-year (Y/Y), and total sales also saw an increase of 2.5% (Y/Y).

On face value, these figures were confusing to me as I was expecting a decline. However, upon further analysis, these numbers were boosted by the company’s other segments. UK and Republic of Ireland retail sales saw declines of -1.5% and -2.4% respectively. But healthy growth in fuel (44%), Tesco Bank (39%), Booker (19%), and central Europe (9%) helped push the overall top line up.

What caught my eye most was Tesco’s Booker business, which caters food for smaller grocery stores and restaurants. It is a market leader with strong pricing power, high margins, and a growing customer base.

The subsidiary saw 19.4% growth (Y/Y) and 19.6% growth on a three-year like-for-like basis. This is impressive given that CFO Imran Nawaz confirmed that catering inflation is running higher than retail inflation. Given its higher margins, I expect Booker’s performance to hedge against the lower margins from Tesco’s retail business.

Tesco is the way to go

Despite a decline in retail sales, Tesco still manages to outperform the bulk of its peers. In the most recent quarter, the grocer snatched up a further 0.37% of market share, further establishing itself as a market leader. CEO Ken Murphy attributed this growth to a number of factors. These include low prices, its Clubcard scheme, supply chain availability, and shopping experience.

This is evident as Tesco increased its line of Aldi price match and Low Everyday Price products by 19% (Y/Y). Additionally, the FTSE 100 firm had the largest improvement in quality and value perception since the pandemic, showing that shoppers do enjoy shopping at Britain’s number one supermarket.

Drop the Basket

Positives aside, there’s no doubt that Tesco faces strong economic headwinds. Its CEO even went on to say, “We are seeing some early indications of changing customer behaviour as a result of inflationary environment”. As a result of this, I expect Tesco’s shares to take a further dip in the near-term.

Nonetheless, management reaffirmed the company’s retail profit guidance, which remains unchanged at £2.4bn to £2.6bn. This is largely similar to its FY22 figure, although free cash flow is expected to come in shy at £1.4bn to £1.8bn.

That being said, its balance sheet is in a modest position. Tesco boasts a debt-to-equity ratio of 47.3% with decent levels of cash and equivalents. As it continues to establish further dominance in the groceries market, I’m confident that Tesco is in a firm position to brave a potential recession. Even so, its low growth potential doesn’t fit my personal investment strategy. So, I won’t be buying Tesco shares for the time being.

The post Is the Tesco share price great value at £2.50? appeared first on The Twelfth Magpie.

More reading

• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Are Tesco shares losing their momentum?
• Tesco’s share price drops 2% on Q1 trading miss. What’s gone wrong?
• As Tesco shares dip on Q1 results, is this a brilliant time to buy?
• How much might £19,999 in a Cash ISA be worth in 2036?

John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Grocery sales slump

Kantar’s latest grocery figures continue to show that sales are declining at supermarkets. Grocery sales continued to dwindle, dropping a further 4.4% in the 12 weeks to 15 May. Additionally, the average grocery basket is now 7% more expensive than it was last year, up from the 5.4% figure last month. Tesco shares don’t exactly scream ‘buy’ given the pessimistic data.

In fact, more than one in five households now consider themselves as struggling in this high-inflation environment. Within this group, rising groceries prices are a concern to over 90% of them. This makes groceries the second most important issue behind high energy bills. Nevertheless, Tesco could capitalise on this shift in consumer sentiment.

Jubilant month

Amid all the negative statistics, the summer months could help Tesco’s top line, especially with the upcoming Platinum Jubilee holiday.

With a four-day bank holiday weekend on the horizon, we’re expecting people to celebrate with friends and family. Looking back at the Diamond Jubilee in 2012, we saw a 10% boost in supermarket sales during the week leading up to the festivities. We should never underestimate the appetite for a party, especially a royal one.

Source: Fraser McKevitt, Kantar Head of Retail and Consumer Insight

Tesco has managed to buck the trend of many of its peers. It saw its market share grow 0.4% year on year (Y/Y) to 27.4% while many of its other competitors lose out. Moreover, the FTSE 100 firm saw the smallest decline in sales among its two biggest peers, Sainsbury’s and Asda. This could be a result of Tesco’s Aldi price match campaign, as its change in sales outperformed the industry average.

It should also be noted that the UK government recently unveiled a range of measures to combat the cost of living crisis. It’s offering a £650 one-off payment to support the UK’s most vulnerable households among other measures. Consequently, this could ease the decline in supermarket sales.

Good deal?

Is the current Tesco share price a good deal then? Its shares are trading at a price-to-earnings (P/E) ratio of 13, making it slightly cheaper than the FTSE 100’s average of 15. The Tesco stock also has a dividend yield of roughly 4%, which could hedge against a slight decline in its share price. And as the largest supermarket in the UK, I feel that Tesco shares could possibly be the best supermarket stock for me to own.

Nonetheless, I do have a couple of reservations as the retailer still faces tough competition. Sainsbury’s recently committed £500m to lower its prices alongside Tesco, while its German counterparts continue to capture more market share. Furthermore, the trickle-down effect of government relief may not be as impactful as many expect it to be, only bringing a possible temporary relief to the Tesco share price.

So, even though Tesco has plenty of merits as a defensive stock, I don’t see its share price rebounding by a substantial amount given the intense competition and macroeconomic headwinds. Therefore, I won’t be buying Tesco shares any time soon. Instead, I’ll be looking to purchase other shares that could benefit from a potential stock market crash.

The post Are Tesco shares a buy now? appeared first on The Twelfth Magpie.

More reading

• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Are Tesco shares losing their momentum?
• Tesco’s share price drops 2% on Q1 trading miss. What’s gone wrong?
• As Tesco shares dip on Q1 results, is this a brilliant time to buy?
• How much might £19,999 in a Cash ISA be worth in 2036?

John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended Sainsbury (J) and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Inflation is currently sitting at 7%, and is expected to continue rising for the coming months. As a result, retail spending has seen a drop, as the cost of living crisis continues to hit consumers hard. The effects of this are already heavily impacting the largest supermarket in the UK, Tesco (LSE: TSCO). So, with all that in mind, the Tesco share price could dip further and present long-term shareholders like myself with a buying opportunity.

Slip and slide

The latest ONS inflation survey reported that 83% of respondents saw an increase in their cost of living. To make matters worse, almost a third of adults are finding it harder to pay their usual household bills. The consequence of this was evident in the latest retail sales numbers, which saw a 1.4% decline month on month (M/M). The ONS stated, “Food store sales volumes fell by 1.1% (M/M) and have fallen each month since November 2021”.

Where does Tesco stand in all of this, you may ask. Well, grocery retailers in the UK were already in a hot battle for customers. Grocery stores operate on high volume and low margins, so securing market share is a BIG deal. While Tesco continues to dominate more than a quarter of the supermarket industry, it has seen its market share slip from 31% to 27.3% today.

A Lidl worry

Kantar’s most recent grocery report showed that grocery price inflation reached an 11-year high of 5.9%. Overall supermarket sales fell by the same amount as a consequence. In fact, in the 12 weeks to 17 April, Tesco has seen a 4.8% decline in sales. Meanwhile, its budget competitors, Aldi and Lidl, together managed to increase sales by 8.2% in the same period. Tesco’s decline, though, put it in the best position among its high street peers. This is in large due to its market dominance and its latest Aldi price-match strategy.

Mixed bag of goods

The grocery retailer is already operating on a minuscule profit margin of 2.5%. The recent wage increases for its workers and lower prices to match Aldi’s aren’t going to help its bottom line. Recent guidance given by Sainsbury’s painted a gloomy picture too, citing, “Significant external pressures and uncertainties, including higher operating cost inflation”.

Nevertheless, there’s a silver lining among the gloomy clouds. Although Tesco expects its margins to take a hit, it still maintains the highest margins in the industry. Its excellent relationship with suppliers should help it keep prices low and maintain profitability. Moreover, its Clubcard scheme encourages customer volume through discounted offers.

The Tesco share price is also trading at a price-to-earnings (P/E) ratio of 14, making it the cheapest British grocery stock. Additionally, its track record of maintaining market dominance makes this a valuable blue-chip stock that pays a decent 4% dividend.

With its share price expected to continue dipping from lower sales, it could be seen as a buying opportunity. However, due to its slim profit margins in an already saturated market, I don’t see shares in the grocery giant bringing me a meaningful return over the long term. As such, I won’t be investing in Tesco shares.

The post What comes next for the Tesco share price? appeared first on The Twelfth Magpie.

More reading

• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Are Tesco shares losing their momentum?
• Tesco’s share price drops 2% on Q1 trading miss. What’s gone wrong?
• As Tesco shares dip on Q1 results, is this a brilliant time to buy?
• How much might £19,999 in a Cash ISA be worth in 2036?

John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended Ocado Group, Sainsbury (J), and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A Lidl worried about Aldi’s prices

In its earnings statement, Tesco cited a cautious outlook as March’s CPI figure came in higher. With increasing food costs, many consumers have been flocking to budget competitors, Lidl and Aldi. This is evident in Kantar’s latest supermarket report as the two German retailers have seen an increase in their market shares. Nonetheless, Tesco reiterated its commitment to maintain its current prices. Unfortunately, this will also mean that its profit margins will most probably take a hit in the short-to-medium term. The firm also cited “significant uncertainties in the external environment”, giving a £2.5bn forecast for its operating profits in FY23. This is lower than the average £2.8bn analysts were expecting, and is the main reason why the Tesco share price is down 5% at the time of writing.

Squeezing every drop of juice

A consequence of inflation is that it sometimes leads to a wage-price spiral. This is when prices increase as a result of higher wages, and vice versa. As a result of this, Tesco decided to increase the wages of its workers by up to 6%. This could affect Tesco’s already narrow margins even further. This is worrying investors and several analysts who’ve dropped Tesco’s rating from buy to hold.

Nevertheless, CEO Ken Murphy mentioned on the company’s earnings call that Tesco will be using its new-found cash to invest in its supply chains. This should ease the margin pressure, and provides a silver lining in all the uncertainty as Tesco aims to work in close partnership with its suppliers to keep costs under control.

SUPERmarket

There were a couple of excellent points from Tesco’s FY22 results, however. For one, it reported stellar numbers across the board. There were healthy increases in revenue, earnings per share, free cash flow, operating profit, and a decrease in net debt. In addition to that, a £750m stock buyback was announced. This means that shareholders will be getting a bigger slice of ownership in the company, driving earnings per share higher. Normally, this would send the Tesco share price soaring. However, because the stock market often trades on speculation, Tesco’s amazing performance has been overshadowed by supply chain disruptions and inflation.

Yet I’m bullish about its long-term prospects and its ability to overcome the impending storm. I believe that Tesco’s quality and massive market share in the sector is a unique selling point. As such, it should be well positioned to maintain its position in the industry for the foreseeable future. The company’s customer loyalty plan and scale still makes it by far the best supermarket stock to buy, in my opinion. Tesco’s plan to price-match Aldi on 650 items also shows its negotiating power with suppliers. As such, with a low price-to-earnings ratio and reasonable dividend, Tesco is a lucrative buy for me if I was looking to earn some passive income from a decent dividend-paying company.

The post Here’s why the Tesco share price is down 5% after earnings appeared first on The Twelfth Magpie.

More reading

• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Are Tesco shares losing their momentum?
• Tesco’s share price drops 2% on Q1 trading miss. What’s gone wrong?
• As Tesco shares dip on Q1 results, is this a brilliant time to buy?
• How much might £19,999 in a Cash ISA be worth in 2036?

John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Tesco (LSE: TSCO) and Ocado Group (LSE: OCDO) are two FTSE 100 supermarket stocks that have experienced different fortunes over the past couple of years. While the Tesco share price went into freefall in early 2021 during the coronavirus pandemic, the Ocado share price soared in tandem with rising consumer demand for online grocery shopping. However, things have changed recently. On a 52-week basis, the Tesco share price is up by 19% compared to a -45% drawdown for Ocado. 

Let’s examine which stock I believe offers better value at today’s prices.  

Tesco share price: a value proposition 

Tesco is the UK’s largest supermarket chain. It also runs operations in central Europe and Asia in addition to a retail banking division. With consistent demand for its groceries and a traditional bricks-and-mortar business approach, for me, Tesco stock is a defensive investment prospect. The company’s market cap is over £28.3bn and Tesco has historically offered shareholders reliable dividends and earnings growth.  

The Tesco share price stands at around 273p, slightly towards the upper end of its five-year trading range from a low of 210p in 2017 to a high of 337p in 2018. Tesco’s price-to-earnings ratio sits just above four, making it one of the cheapest FTSE 100 shares. Moreover, the stock’s current dividend yield of 3.28% is pretty close to that of the FTSE 100 index as a whole, at 3.56%.

As inflation rises, the Tesco share price could come under pressure. Rising food costs and supply chain disruptions could act as bearish headwinds. However, Britain’s largest supermarket looks better placed to cope with these threats than many direct competitors, such as Sainsbury’s and Marks & Spencer, due to strong customer loyalty.

Over 20m Brits own a Tesco Clubcard. Although Tesco operates in an intensely competitive market, the discounts Clubcard holders benefit from should mean the Tesco share price will resume its upward trajectory over the coming months in my view, despite the inflationary environment.

Ocado share price: a growth stock

In contrast to Tesco, Ocado is a more speculative stock for me. Ocado specialises in online grocery shopping, but it also resembles a tech stock in some ways. For instance, the company uses AI in its Ocado Smart Platform to offer efficiency improvements in its partners’ grocery e-commerce operations.

The Ocado share price typically experiences greater volatility than the Tesco share price. Furthermore, Ocado currently trades at a negative P/E ratio, does not distribute dividends, and has never turned a profit. This concerns me as Ocado has been trading for over two decades. 

Bulls can argue that Ocado is one of the most innovative companies in a sector dominated by more traditional business models, with its focus on software and warehouse robotics. If this really is the future of retail, Ocado shareholders should stand to benefit.

Nonetheless, Ocado posted a pre-tax loss of £177m for 2021. As consumers revert to their pre-pandemic in-store shopping habits, I’m struggling to be optimistic for Ocado’s share price.  

Which FTSE 100 stock is the better buy for me?

Right now, I’m looking to invest in quality stocks and de-risk my portfolio away from more speculative plays. Accordingly, for me, Tesco constitutes a good value stock to invest in for 2022. I view Tesco as a better buy for me than Ocado at present. 

The post Ocado vs Tesco share price: which FTSE 100 stock is the better buy? appeared first on The Twelfth Magpie.

More reading

• Here are 2 FTSE shares I’m excited about this July — and 1 I’m avoiding
• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Can anything save the Ocado share price?
• Are Tesco shares losing their momentum?
• Tesco’s share price drops 2% on Q1 trading miss. What’s gone wrong?

Charlie Carman does not own shares in any of the companies mentioned. The Motley Fool UK has recommended Ocado Group, Sainsbury (J), and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, over the past five days, the share price has struggled, falling over 4%. What’s more, year-to-date the shares have fallen 2%. Does this mark the perfect opportunity to grab some cheap shares for my portfolio? Let’s take a close look.

Solid fundamentals

Inflation is wreaking havoc with markets, increasing volatility and creating uncertainty for investors. Whilst Tesco is not completely immune to this threat, it may be in a better position than some of its other FTSE 100 counterparts. Firstly, the retail grocery sector is highly defensive. Due to the consistent demand for Tesco products, the stock tends to provide stable dividends and earnings regardless of wider market moves. Secondly, Tesco has the market power to negotiate prices with suppliers, keeping them low, which could help draw in customers.

Considering the Tesco share price valuation, I also see positives. Trading at a mere 3.4 price-to-earnings (P/E) ratio, the stock seems to offer great value. For context, competitors Sainsbury’s and Marks and Spencer trade at P/E ratios of 11.9 and 9.5 respectively. In addition to its low valuation, Tesco also offers a healthy 3.1% dividend, which is very attractive to me.

A final point that excites me about the business is its newest venture, Tesco Whoosh. It’s a superfast delivery service, currently operating out of 115 stores. This number is expected to rise to 600 by the end of 2022 and offer over 1,700 products for customers. In my opinion, this is a great move from the grocery giant, as it allows Tesco to compete with smaller, fast delivery companies such as Gorillas and Getir.

Tesco share price risks

However, the supermarket landscape is a highly competitive and low-margin one. This means that the top producers are always competing on price. Complications from both Brexit and the pandemic led to severe supply chain issues across the industry. As a result, Tesco was forced to raise wages, which put further pressure on margins.

In addition to this, if inflation continues to trickle into Tesco product prices, consumers may begin to turn to cheaper alternatives such as Lidl and Aldi. This could impact revenues and would likely lead to a drop in the share price.

Should I buy?

All things considered, I like the look of the current Tesco share price for my portfolio. Although inflation creates the risk of rising prices, I think the defensive nature of the sector, coupled with Tesco’s industry clout, is enough to outweigh this risk. What’s more, with the share price falling over the past five days, I think now could be an opportunity for me to grab some discounted shares. Overall, at such a low valuation, I feel Tesco could prove a solid long-term investment for my portfolio.

The post The Tesco share price is falling: should I buy now? appeared first on The Twelfth Magpie.

More reading

• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Are Tesco shares losing their momentum?
• Tesco’s share price drops 2% on Q1 trading miss. What’s gone wrong?
• As Tesco shares dip on Q1 results, is this a brilliant time to buy?
• How much might £19,999 in a Cash ISA be worth in 2036?

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.